????Obviously, Kroenig's view is more aggressive than the administration's in terms of how to deal with Iran, and his essay shouldn't be construed as carrying water for the administration, despite being a former advisor to the Secretary of Defense. Regardless, if the resilience of the price of oil, strong actions by the Iranians, and strong language by the Americans are telling us anything, it is that the Iranian issue is not going away in the short-term.
Historical oil prices
????In the scenario that military action is taken against Iran, the risk management question to ponder is: what will the impact on the price of oil be? As a proxy, in the two charts below, we evaluated how the price of Brent reacted in the six months leading to Gulf Wars I and II and the six months preceding. In Gulf War I, the price of oil ran up into the event and then almost doubled as the invasion ensued, but six months later was lower than the price at the start of the war. In Gulf War II, which was slightly different given the long anticipatory period, the price of Brent actually sold off on the news and six months later was basically at the same price.
????Currently, at least based on mainstream reports, an invasion of Iran is not being seriously contemplated, but rather the likely action, if any, would be a strategic strike, so it is perhaps somewhat inaccurate to compare the Gulf Wars to a potential action in Iran. Conversely, though, Iran is a much more critical player in the world oil supply. Specifically, after Saudi Arabia and Canada, Iran has the third most reserves globally, about 10% of the world's total. And Iran is the third largest oil exporter after Russia and Saudi Arabia.
????The heightened rhetoric relating to Iran comes at a time when Saudi Arabia is reportedly pumping close to capacity at 10 million barrels per day. This means that there is very little spare capacity in the event of either the Iranians closing, even if for a period of time, the Strait of Hormuz, or a strategic strike against Iran that shutters some of their production. Thus, we shouldn't be surprised by the resiliency in the price of oil, particularly Brent.
